There are more employees than clients in Andreas Triandafillidis’s clothes shop in central Athens. Austerity has kicked in and the shirts stay on the racks despite a 50 percent discount. «People just walk by, they don’t even look at our window,» said Triandafillidis, 58, standing in the near-empty shop at the end of the summer sales season. His revenues are down 30 percent and many neighboring shops have shut – nearly one in five in the center, according to the Greek retailers’ association. The rows of empty shops show that the debt crisis has now entered a new stage, spilling over from financial markets and newspaper headlines to the streets under the impact of a drastic austerity plan aimed at bringing the country back to fiscal health. Civil servant wage cuts, pension freezes, a 4-percentage-point increase in value-added tax (VAT) to 23 percent this year, fresh excise taxes and overall concerns about recession have shrunk consumption and sent retail sales to a seven-year low. The drop in public consumption had so far been broadly in line with expectations given the size of the austerity package. But analysts warn the backlash will get stronger in the coming months as the effect of the austerity measures sinks in, threatening the growth needed to meet deficit-cutting targets in a country where private consumption accounts for 70 percent of economic output. «The danger is that by tightening fiscal policy that much, it may actually be counterproductive for the fiscal targets, it might actually kill off any kind of activity,» said Diego Iscaro at IHS Global Insight. «The impact on activity may be huge and that’s what we are seeing at the moment.» Frightened consumers Shrinking retail sales are hitting tax collection, already below expectations, with ordinary budget revenues in January-July standing 770 million euros short of a 29.4-billion-euro target, even though the VAT hike and a drive to get shops to issue more tax receipts partly compensate for the drop in consumption. The slump continued in July and August with the worst summer sales in over a decade, down by a quarter from an already weak 2009, said Vassilis Korkidis, chairman of retail trade association ESEE, predicting that tens of thousands more shops were likely to close as austerity measures sink in. Consumer confidence is at record lows and retailers all around Athens, from pharmacies to clothing and stationery shops, report that clients have cut shopping to essentials, postponing buying that extra shirt or cosmetic product until better times. Clothing shops have been hit hardest, together with footwear and department stores, data show, with annual drops of as much as 20 percent in April and over 10 percent in June, while retail sales overall slipped by 4.4 percent in June. «The economic adjustment program is frightening consumers,» Korkidis said, adding that only mobile phones and Internet services were in the black, a sign that people were adapting habits to austerity, staying indoors to surf the Internet rather than going to a restaurant. Some analysts say the drop in domestic consumption may be a necessary painful step toward reforming the economy and boosting lagging competitiveness – if it is accompanied by the right structural reforms and accepted by the public. «There is going to be pain in the short term… more closure of businesses, a greater increase in unemployment in the next one to two years,» said Platon Monokroussos, economist at Eurobank EFG. «[But] we need to have a decline in domestic economic activity to reduce the external imbalance and drive inflation lower.» Missing targets? Analysts say that despite lagging revenues and public discontent, the Socialist government, which has drastically cut spending, is likely to meet or only narrowly miss a target to cut the budget deficit to 8.1 percent of gross domestic product this year, with recession in line with a forecast of minus 4 percent. But down the line, shrinking consumption will take more of a toll and public support may wane further, with analysts citing social unrest as a significant risk in a country where people are prone to take to the streets. «You wonder… whether the government will still have the political support to carry on this policy in two to three years’ time; I think it’s unlikely,» Iscaro said, adding this was the main risk to achieving the targets agreed to with the European Union and International Monetary Fund. Support for the ruling party has slipped under 30 percent, although Prime Minister George Papandreou remains relatively popular. Businesses are also angry, with seven in 10 small enterprises saying government cuts will make things worse, a poll by the confederation of small businesses GSEVEE showed, forecasting that 20 percent of small enterprises were likely to shut down. But analysts say the government has little leeway to respond to calls to cushion the impact of austerity as it focuses on slashing its deficit under the terms of the 110-billion-euro EU-IMF bailout that saved it from bankruptcy in May. The government cannot spend money to protect jobs or offer a stimulus package, analysts said. Plans to put an end to monopolies and slim down the state may boost the economy in the longer term but will add to strains in the meantime. Papandreou’s Cabinet must press ahead or face restructuring the country’s debt, an option it has repeatedly ruled out. «The government is in a corner where it has no choice but to continue to implement the measures… almost regardless of the economic impact,» said Ben May at Capital Economics.